AICPA Exam CPA-Business Topic 3 Question 65 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 65
Topic #: 3

The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm's net cost of debt?

A8.4%

B9.8%

C12.0%

D14.0%

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. Return on investment equals net income divided by average invested capital:

Choices 'a', 'b', and 'd' are incorrect, per the above calculation.

by Mitsue at Feb 07, 2023, 06:04 AM

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Shenika

2 months ago

A) 8.4% looks like the right answer to me. The net cost of debt should be lower than the effective interest rate due to the tax deduction. Now, if only I could figure out how to deduct my gym membership as a business expense...

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Delmy

14 days ago

I agree, A) 8.4% seems like the correct answer considering the corporate tax rate.

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Stephen

17 days ago

Yeah, the net cost of debt is definitely lower than the effective interest rate because of the tax benefit.

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Hildred

23 days ago

I think you're right, A) 8.4% makes sense with the tax deduction factored in.

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Daren

2 months ago

I hate these tricky finance questions. Can we just skip ahead to the multiple-choice section on corporate mergers and acquisitions? That's where I really shine.

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An

2 months ago

Hmm, I'm not sure about this one. The coupon rate is 12% and the effective interest rate is 14%, so I'm tempted to go with D) 14.0%. But then again, the tax rate needs to be factored in. I'll have to double-check my calculations.

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Truman

1 months ago

I believe it's 12.0% because we need to factor in the tax rate as well.

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Yen

1 months ago

C) 12.0%

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Ettie

2 months ago

Hmm, I think the net cost of debt is actually 8.4% after considering the tax rate.

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Keneth

2 months ago

A) 8.4%

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Gilberto

2 months ago

The question is asking for the net cost of debt, so the correct answer must take into account the corporate tax rate. I'll go with B) 9.8% - it seems to be the only option that considers the tax deductibility of interest payments.

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